Traditional banking institutions are being phased out in favor of digital counterparts.
Rebuilt Banking: A New Era for Russia's Financial Sector
The Russian financial industry is experiencing a seismic shift as the old analog banking model is being replaced by a modern, digital system. Big names in markets, telecom, and tech companies have jumped on the bandwagon, along with some unexpected players. Let's discuss the upcoming transformation, as outlined by Vladimir Frolov, Alexei Romanchuk, and Andrei Dorofeev from AO "Digital Dynamics".
- Remember when we assumed numerous holdings would acquire their own banking structures? Well, that happened, and then some!
Marketplaces like OZON, WB, and Yandex have launched their banking divisions. But it's not just the heavyweights like Beeline, TELE2, and giant tech companies such as Avito, VK Group, and SKB Kontur that are getting in on the act. Even medical networks and precious metal producers are considering their own digital banking solutions - it's no surprise, given the unparalleled liquidity of gold in today's market.
Meanwhile, traditional banks find themselves clinging to the remnants of their past glory, spinning tales of their programmers' world dominance while making little to no real progress. The truth of the matter is that these banks are burdened by decades of outdated software that serves as an anchor, threatening to pull them under if they don't break free.
Modern, next-generation banks are all about progress - they're racing towards the latest Bank-as-a-Service (BaaS) technology. Banks on this platform are on the rise in the Russian market, and their irresistible advance will not be stopped. Luddites may have faced defeat in the past, but scientific and technological progress is always relentless.
Traditional Banks: The Millstone Around Their Neck
Traditional banks have been automated for some time now, but their IT infrastructure remains outdated. Fragmented software is often poorly integrated, both internally and with external solutions. This lack of seamless integration and open APIs makes the development of innovative products difficult.
Modernizing the IT infrastructure is a daunting task, as banks operate around the clock, leaving precious little downtime for updates. Moreover, banks have little margin for error, as dissatisfied customers will quickly jump ship to more stable competitors. Modern technologies for continuous software updates are usually off-limits due to the banks' archaic architecture.
Additional hurdles for traditional banks include high overhead costs due to inefficient processes, the requirement for extensive staff and branch networks, constant regulatory pressure, and high-security demands. Sadly, many traditional Russian banks were ill-prepared for globalization, the sudden shift to online banking, and the withdrawal of Western software producers from the market.
The Rise of Neobanks
The first to successfully challenge traditional structures in the 2000s were neobanks - banks without physical branches, without the burden of cumbersome paperwork. Unencumbered by old software and bureaucracy, they began with more modern technologies and drew in skilled IT professionals.
Western neobanks like Simple, Moven, HelloBank, BankDirect, and AtomBank are steadily displacing their analog counterparts. In Russia, the neobank landscape evolved with the emergence of Tinkoff Bank, Modulbank, Rocketbank, Touch Bank, and TalkBank. Other homegrown neobanks found a home within the ecosystems of Yandex, Wildberries, and Ozon.
Ozon fintech, for instance, already accounts for over 30% of the company's revenue. In 2024, Ozon fintech's revenue reached 93.3 billion rubles, profits before taxes soared to 26.5 billion, and the number of active clients surpassed 30.3 million people. Funds held in deposits and accounts increased a staggering 3.6 times, to 193 billion rubles.
Telecom giants are also on the move, with companies like MTS and Beeline building their ecosystems, complete with fintech sectors. Even developers have ventured into the banking business - if not for the housing market crisis, GK "Samoslet" would have launched its fintech project based on its homegrown bank in 2025.
A Digital Banking Future
In recent years, we have witnessed the emergence of a revolutionary trend - digital banks built on the BaaS foundation. We believe that there's a fundamental difference between the concepts of digital banks and neobanks - BaaS-based banks are truly digital, while neobanks are simply advanced banking apps connected to an aging infrastructure.
A fully-fledged digital bank can accommodate an unlimited number of neobanks developed by external fintech teams. Thanks to BaaS platforms, a bank or ecosystem operator can focus on end products, while the platform takes care of the complexities of automation and integration of internal systems.
Leading examples of Russian digital banks include SKB Kontur and Point. Created in collaboration with Otkritie Bank, Point changed hands to Vladimir Potanin following Otkritie's merger with VTB in 2023. The $500 million deal signifies the high value placed on this bank by the financial market expert community.
What Comes Next
The future will see digital banks ascend, challenging the status quo and forcing traditional banks to adapt or perish. The Russian banking system is faced with unprecedented sanctions pressure, and the transition to peaceful times will bring new credit challenges for defense enterprises, excessive consumer credit, a development crisis, a sharp drop in car sales, and, inevitably, a significant number of defaults across various sectors.
In this volatile environment, the opportunity arises for a fundamental reshaping of the financial market. Newcomers, such as neobanks, fintech projects, or even outsiders with modern Bank-as-a-Service platforms, could seize the day and swiftly overtake traditional banks.
For more information about BaaS technology, check out the in-depth article on the "Digital Economy" website.
Note: This article is based on enrichment data that offers an overview of the progress and challenges in Russia's transition towards digital banking. The adoption of the digital ruble, remote financial services, neo-banking, and lifestyle banking are examples of the progress, while the challenges faced by traditional banks include the need to adapt to new technologies, competition from neo-banks, financial inclusion, and regulatory compliance.
- I'm not sure if the traditional Russian banks are ready for the future of the finance industry, given the challenges they face in modernizing their outdated IT infrastructure and adapting to new technologies.
- Andrei, along with Vladimir Frolov and Alexei Romanchuk, have highlighted the rise of neobanks and fintech projects as a fundamental shift in Russia's financial sector, with companies like OZON fintech and Point emerging as leading examples of digital banks.
- Companies from various industries, such as telecom, tech, medical networks, and precious metal producers, are migrating towards fintech ecosystems, suggesting a broader transformation of the entire business and finance industry.
- The success of fintech startups like Tinkoff Bank, Modulbank, Rocketbank, Touch Bank, and TalkBank indicate that the Russian fintech industry is maturing and gaining competitiveness, potentially surpassing traditional banking institutions.
- The future evolution of the Russian financial sector will depend on the ability of traditional banks to fintech migrating and adopting next-generation technologies like Bank-as-a-Service (BaaS), or risk being left behind in this digital era for Russia's financial sector.
